On Oct. 3, 2016, you and your family will have new, expanded credit protections when new rules implementing the Military Lending Act take effect. Avoid falling into the trap of taking on a loan you cannot afford by understanding all the protections the MLA has to offer. These frequently asked questions can provide you with answers to help you know before you owe.
- What is the Military Lending Act? The MLA limits the annual percentage rate for credit to no more than 36 percent and includes associated costs of the loan, like fees and the sale of credit products sold with the loan. This rate is known as the military annual percentage rate, or MAPR. Additionally, the Military Lending Act prohibits mandatory arbitration, difficult contract provisions, using an allotment to secure the loan, waiving Servicemembers Civil Relief Act rights, charging a penalty for early payments, using a post-dated check to secure a loan, refinancing certain loans and the use of bank accounts and car titles to secure certain other loans.
- Who does the Military Lending Act apply to? The Military Lending Act applies to active-duty members, members of the Reserve Component when activated 30 days and longer, and family members enrolled in the Defense Enrollment Eligibility Reporting System, or DEERS.
- What kinds of credit does the new rule cover? Current protections cover payday, vehicle title and tax refund anticipation loans. Along with the current protections, the new MLA changes cover credit as defined in the Truth in Lending Act, which include installment loans, pawn loans, open-end credit and credit cards as well. Purchases made through rent-to-own and overdrafts on checking accounts are not covered by TILA and, therefore, are not covered by the rule changes. The MLA does not apply to mortgages and certain secured loans for the purchase of personal goods and vehicles when the loan is secured by those items.
- When must creditors comply with changes to the rule? Most creditors will need to comply with the rule changes by Oct. 3, 2016. Credit card providers have until Oct. 3, 2017.
- Where can service members find sources of credit if they need it when the rule changes go into effect? Most creditors offer loans under the 36 percent MAPR cap so there will be plenty of credit sources available. Creditors have had a year to be ready to offer loans in compliance with the rule. The only loans not available to a covered borrower will be loans that charge more than 36 percent MAPR.
- What if a service member needs a loan and all he or she can qualify for is credit that doesn't comply with the MLA? Military relief societies assist members and families with unexpected or emergency expenses. Service members and their family members, who need more than a small loan and are unable to qualify for a loan under the 36 annual percentage rate cap, may need financial counselling along with short-term cash. Reasonable creditors check to see if a borrower can pay back the loan (and meet other obligations). Consequently, being turned down for a loan with an annual percentage rate of 36 percent is a good indication that the service member may need help to resolve long-term financial issues.
- How will creditors know if a person is in the military or a family member? It is the creditors' responsibility to identify whether borrowers are covered by the Military Lending Act. The new rule directs creditors to a database maintained by the Defense Manpower Data Center that provides the creditor with immediate feedback on whether the borrower is on active duty or a family member of an active-duty service member.
- What happens to creditors who make loans in violation of the MLA to covered service members and their dependents? Federal or state government supervision of creditors holds them accountable for their lending practices. Creditors risk having to refund loans (principal and interest) and potentially pay fines for violating the new rule.
- Why enact this law or rewrite this rule? Predatory lending practices continue to have a negative effect on the financial well-being of service members and their families, and the efforts to educate service members have not been enough. The previous regulation controlled the most obviously problematic credit products. Unfortunately, plenty of opportunities for service members and their families to access high-cost loans still exist. Some creditors offered loans outside of the definitions in the previous regulation or found ways to modify their loans to sidestep the Military Lending Act. For example, the previous Military Lending Act rule on payday loan products applied to loans with durations of fewer than 91 days. Some creditors made loans with terms of 92 days or longer to dodge this rule.
- Where can a service member find financial counseling? Service members and their family members have access to personal financial counselors who provide assistance with developing spending plans, managing personal finances, financial planning and debt reduction. Free personal financial counseling is available through installation Military and Family Support Centers, and personal financial counselors through the Military and Family Life Counseling Program. Military OneSource has financial counselors available 24/7 at 800-342-9647.
- Where can I get help if I feel my rights under the MLA are violated? Service members and dependents may report consumer credit concerns, including MLA related issues, to the Consumer Financial Protection Bureau at http://www.consumerfinance.gov/complaint.
The Military Lending Act protects you and your family members from predatory lending and the cycle of excessive debt. Knowing your rights may help you make sound financial decisions and work toward a more secure financial future.